How US tariff war will impact Indian firms

US President Donald Trump has put the global market on tenterhooks with his aggressive rhetoric on import tariffs. Highlighting the skew in trade balance, Trump has threatened reciprocal taxes on goods imported from countries that impose ‘unfair’ duties on US exports.

While his ire is mainly directed towards large trading partners like Europe, China, Canada and Mexico, India is also in his crosshairs. How will a full-blown tariff war impact India Inc. and what will be its effect on the stock market? In a series of tweets, the US President recently pointed out that the US had lost $800 billion in yearly trade deficit because of its ‘very stupid’ trade deals and policies.

Why the US is itching for a trade war The country has been running a trade deficit with India for several years. Figures are in $ billion

US jobs and wealth are being given to other countries and they have taken advantage of the US for years, said Trump, warning that he would not allow it anymore. Sounding confident of coming out on top, Trump has effectively let out a war cry: “When a country (US) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,” he says. He has already set his plan into motion, proposing 25% tariff on steel imports and 10% on aluminium. These increasingly protectionist measures by the US, however, threaten to derail the global economic growth engine, warn analysts.

Most vulnerable Indian exports Diamonds and pharma top Indian exports to the US Source: The office of the U.S. Trade Representative (USTR)

Trump’s rhetoric has prompted other countries to threaten retaliatory tariffs, followed by counter-threats by the US, raising concerns of tit-for-tat protectionist measures that were a feature of the Great Depression in the 1930s. Ambareesh Baliga, an independent market expert, feels an all-out trade war will prove detrimental to global markets. “Global economic growth hinges on the free movement of goods.

If we revert to large-scale nationalism, it could set growth back by a couple of decades,” he says. If this plays out, capital markets will feel the heat. India is ninth in the list of US' trading partners that have a trade surplus. Trade surplus means that we export more to the US than we import from the country. India's exports account for a hefty 15% of US' aggregate trade with the world. Gems and diamonds are India’s biggest goods exports to the US, followed by pharmaceuticals, textiles, fish and petroleum products.

As of now, these exports are not on the radar of the US, but there is a risk of retaliatory tariffs on these goods. Trump’s clamp-down on steel and aluminium imports will not impact India much as just about 4% of the steel exports flow into the US, while aluminium exports constitute 2% of total US aluminium imports. While the direct impact of higher metal tariffs on Indian firms will be limited, there is a possibility that muted metals demand, owing to cooling off in global trade, will put pressure on prices of these metals.

Further, there is a chance that unabsorbed steel and aluminium exports from other countries may be rerouted and dumped on Indian shores. This incremental supply in the domestic market is likely to put metal prices under pressure, hurting the operating profits of Indian metals and mining firms, such as Tata Steel, SAIL and Hindalco, among others. “The US trade protection measures will lead to a temporary disruption in a few regional markets as new trade channels open up to cater to supplies left behind from reduced US exports,” says Abhishek Poddar, Analyst, Kotak Securities.

However, the potential steel mill and aluminium smelter restarts in the US will not significantly weaken the outlook on global aluminium and steel. Especially, given supply side reforms in China in these industries, says Poddar. Trump has also come down heavily on higher import duty on US-made Harley Davidson motorbikes. He previously threatened to slap retaliatory taxes on motorcycles coming into the US from India.

While the Indian government responded by slashing customs duty on imported high-end motorcycles to 75% from the earlier 100%, and eventually cut it down to 50%, the US President was left unimpressed and made it clear that the cuts were not enough. If the US decides to levy equivalent duties, it could affect USbound exports of two leading Indian twowheeler manufacturers—Eicher Motors and Bajaj Auto. The former exports its Royal Enfield range of motorbikes, while Bajaj Auto ships the KTM brand to the US.

However, the volumes are limited to a few thousand units, with the total value of Indian motorcycle exports to the US at just about $6 million (`40 crore) in 2016-17. As such, tariffs are not likely to create a visible dent on these firms’ profitability, which enjoy a strong domestic demand. India’s IT services firms have been exposed to Trump’s protectionist policies for a while. Tighter immigration laws have affected how these firms hire local talent in the US and has restricted the flow of skilled personnel to the US. As things stand, India is not directly affected by the US actions, but the likely spillover effects could bring the domestic markets under pressure.